Transforming a Sole Proprietorship into a Commercial Company

The process of transforming a sole proprietorship (jednoosobowa działalność gospodarcza, JDG) into a limited liability company (sp. z o.o.), which we discuss in this article, may seem complicated, but with the help of professionals you need not worry about preparing documents such as the plan for transforming the sole proprietorship into a limited liability company, the statement on the transformation of the entrepreneur, the appointment of the company's bodies and the articles of association. The transformation allows you to preserve the continuity of the existing business, without liquidating it, and to continue running the business without having to conclude agreements or obtain permits, reliefs and licences anew.

A JDG may be transformed into a single-shareholder capital company, that is: 1) a limited liability company, 2) a joint-stock company or 3) a simple joint-stock company. In this article we discuss the transformation of a JDG into a limited liability company as the most popular form of transformation of a sole proprietorship.

We assist in transforming a JDG into a commercial company by:

1. analysing the situation of the business with a view to transformation into a commercial company;
2. drawing up the plan for the transformation of the entrepreneur;
3. drawing up the attachments to the transformation plan, that is: a draft statement on the transformation of the entrepreneur and a draft founding document (articles of association or statute) of the company adapted to its situation and needs;
4. providing comprehensive assistance with the notarial acts necessary during the transformation;
5. preparing the documents on the appointment of members of the company's bodies;
6. registering the transformed company in the National Court Register (KRS) and deleting the JDG from the Central Register and Information on Economic Activity (CEIDG).

Comparison of a JDG with Commercial Companies

Many Polish entrepreneurs carry on business as a sole proprietorship, which is the simplest form of running a business. A sole proprietorship must be entered in the CEIDG. An entrepreneur who is a natural person and runs a business as a sole proprietorship takes all decisions on the operation of the business, represents it and is liable for its obligations. A JDG has no legal personality, and the business does not perform legal acts in its own name. As a result, running a sole proprietorship involves the owner's unlimited liability for the obligations of the business. This means that the owner is liable with all their assets, both those arising from running the business and their personal assets. A sole proprietorship may be run by only one person and cannot be inherited.

Unlike a JDG, a partnership (general partnership, professional partnership, limited partnership and limited joint-stock partnership) is a participant in legal transactions separate from its partners. It may acquire rights, incur obligations, sue and be sued. It has no legal personality. A capital company (limited liability company, simple joint-stock company and joint-stock company), by contrast, has legal personality and is a full subject of rights and obligations, independent of its shareholders. It may perform all legal acts in its own name.

See also: Business law (in Polish)

Benefits of Transforming a JDG into a Limited Liability Company

Entrepreneurs running sole proprietorships increasingly wish to change the form of their business from a JDG to a capital company as the business develops and grows. Changing the form of business brings a number of benefits. The form of the existing business can be changed without closing the business, by transforming the JDG into a capital company, which helps to avoid losing customers and employees.

The transformation makes it possible to preserve the continuity of the legal existence of the business and to continue the existing activity without having to conclude agreements or obtain permits, reliefs and licences anew. A JDG is transformed into a commercial company without liquidating the business.

Transforming the legal form of a sole proprietorship into a commercial company brings a number of benefits, including:

1. preserving the continuity of the existing business, without liquidating it;
2. taking over all the rights and obligations of the JDG;
3. taking over agreements with counterparties and employees;
4. taking over the permits, reliefs and licences to which the JDG was entitled;
5. limiting liability for the company's obligations. A shareholder of a limited liability company is not liable for the company's obligations. The shareholder's assets are completely separate from the company's assets;
6. enabling a new shareholder to join the company;
7. improving the decision-making process and changing the way the business is managed;
8. allowing shareholders to dispose of their shares, including enabling the sale of the business (shares) to other entities;
9. making succession smoother, because shares in a limited liability company can be inherited (under statutory and testamentary succession);
10. making it possible to contribute the business (shares) to a family foundation.

The principle of continuity relating to company transformations applies, to a certain extent, to the transformation of a sole proprietorship into a commercial company. Under this principle, as a result of the transformation the business retains its legal identity, and the company's rights and obligations do not change.

See also: Business succession (in Polish)

Transforming a JDG into a Limited Liability Company Step by Step

Under the provisions of the Commercial Companies Code (CCC), the transformation of an entrepreneur requires:

1. drawing up the plan for the transformation of the entrepreneur, together with attachments and the opinion of a statutory auditor;
2. making a statement on the transformation of the entrepreneur, indicating the type of company into which the JDG will be transformed;
3. appointing the members of the bodies of the newly formed company (that is, the transformed company);
4. concluding the articles of association or signing the statute of the newly formed company;
5. entering the transformed company in the KRS and deleting the entrepreneur being transformed from the Central Register and Information on Economic Activity.

The transformation plan is drawn up as a notarial deed and should contain at least a determination of the balance sheet value of the assets of the entrepreneur being transformed as at a specified date in the month preceding the drawing up of the plan. The transformation plan is examined by a statutory auditor for correctness and reliability. The auditor issues an opinion on the transformation plan.

See also: Legal services for companies

The transformed company (the newly formed company) may keep the existing business name, but the owner may also give it a completely different name. In the first case, the company designation "sp. z o.o." is added to the existing name of the JDG. If, however, you decide to change the company's business name, the provisions of the Commercial Companies Code require the newly created company to add "formerly" and the name of the existing business next to its business name.

Example:

Jan Nowak Warsztat Samochodowy > Jan Nowak Warsztat Samochodowy sp. z o.o.

Jan Nowak Warsztat Samochodowy > Warsztat Samochodowy sp. z o.o. (formerly Jan Nowak Warsztat Samochodowy)

Transforming a JDG into a limited liability company is undoubtedly more complicated and time-consuming than setting up a new limited liability company, but because of the benefits it brings, it is a solution we recommend to entrepreneurs who wish to preserve the continuity of the legal existence of their business.

The transformation makes it possible to continue the existing activity without having to amend agreements, conclude new agreements or obtain permits, reliefs and licences anew.

Taxation of the Transformation of a JDG

A transformation, regardless of the legal form, is tax-neutral, which means that neither the entrepreneur being transformed nor the transformed company pays income tax (PIT, CIT). The transformation of a JDG into a company is also not subject to VAT. The transformation of a sole proprietorship into a commercial company is subject only to tax on civil law transactions at the rate of 0.5%, calculated on the value of the company's share capital (minimum PLN 5,000.00 for a limited liability company) less the costs of entering the company in the KRS, which amounts to approximately PLN 250.

You will find more information on the legal assistance KHM Law Firm provides to entrepreneurs on the page https://kancelariakhm.pl/pozostala-oferta/przeksztalcenia-fuzje-przejecia/ (in Polish)